US: What’s driving the recent decline in housing starts? - Natixis

US housing starts declined for the third month in a row in May with another downward surprise as regard to consensus expectations, but this trend is quite at odds with fundamentals: the supply of existing homes for sale is dwindling, NAHB confidence remains elevated, mortgage applications for purchases are rising despite slightly higher rates while the unemployment rate is at a cyclical low, according to Thomas Julien, Research Analyst at Natixis.

Key Quotes

“It appears that the main reason for this setback is the multifamily segment with starts being down for their 5th month in a row. Meanwhile, the trend in single family starts remains upward.”

“In short, recent numbers may be more indicative of a slowdown in investment in the multifamily segment rather than suggesting a broad-based deterioration of the housing market.   

• Housing starts once again surprised on the downside in May with a 5.5% decline MoM, to reach 1092K units annualized, much lower than expectations (consensus: 1220K / Natixis: 1200K). Starts were revised slightly downward in April. The decrease was this time driven by both multifamily family units (-9.7%) and single family units (-3.9%). Permits, a leading indicator, also declined against expectations.” 

“Why are starts declining?

The recent trend in starts is quite at odds with fundamentals with the usual drivers of the market improving: (i) the impact of rising rates has been limited so far on demand for credit, (ii) the financial conditions of households is improving with more individual employed and rising wages and last but not least (iii) the inventory of existing homes is shrinking. All these factors indicate that the activity in the construction sector should be improving, not deteriorating.”   

“Looking at what is driving the recent decline, we see that it is mostly attributable to the multifamily segment: starts have been declining for their 5th month in a row (with close to double digit pace in the last 3 months). However, it is important to note that the trend in single family starts remains upward.”

“In short, we continue to expect a moderate recovery in the housing sector since we believe that the recent trend in starts is not consistent with fundamentals.”